financial restructuring This is a topic that many people are looking for. thetruthaboutdow.org is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, thetruthaboutdow.org would like to introduce to you Financial Restructuring Mini Course – 02 of 11 – Simple Example. Following along are instructions in the video below:
“Our simple example starts with the idea that you form a company so this new new company. I m forming it i buy just one asset at this point to the company and it s an investment property for nine hundred fifty thousand dollars so the business idea here is to generate rental income from my investment property so i buy a nine hundred fifty thousand dollar property and i finance. It with a hundred thousand dollar five year bank loan at a five percent interest. It s secured with first liens on all the property receivables equipment and inventory that the company might have at this point.
It s only just that one property. But the notion here is when you go and you borrow money from a bank. You can get secured lower interest rates. If you go to a bank as opposed to the sort of issuing a bond primarily because bank.
That is often secured by collateral and in this case. I ve been able to secure a hundred thousand with a lien on sort of a general lien on all the assets of the company. So. This is sort of a typical kind of collateral that you would see when borrowing money.
I also get a second loan because one hundred thousand isn t enough to give me the whole nine hundred fifty thousand dollars. I get a second loan four hundred thousand dollars with a set. It s a seven year bank loan at seven percent. Now and the reason.
Why they charge a higher interest rates because it s now secured with those same assets. But now it s secured with a second lien in other words. If there s anything left over if there s any collateral value these guys are second in line on the assets above. But as you will see shortly they are this loan is still secured.
It s just a second lien loan..
Which means it s better than an unsecured loan. But it s not quite as secure as a primarily and so that gives me five hundred thousand dollars. A remainder. I find i find with my own money presumably equity.
As i am the owner of the business. So there are many four hundred fifty thousand dollars. I secure with my own equity. So this is what a simple balance sheet.
You know might look like here. And you see you ve got on me on the left side of the balance sheet. You have nine hundred fifty thousand and assets. It s that investment property represents.
The only asset you have obviously once you borrow the money the hundred thousand the four hundred thousand you were able to get the cash that you instantly here. We didn t turn this into a two stage process you just instantly turn around and bought the investment assets. So hopefully that makes lesson one sort of fine point here i put in four hundred fifty thousand dollars of my own money. I incorporated my company when you do that you actually arbitrarily issue yourself a certain number of shares.
So how much is each share worth. It s kind of an arbitrary decision upon incorporation. If you issue yourself ninety thousand shares say then at a four hundred fifty thousand initial value under gaap you would record the value of each share. It s five dollars per share.
So five dollars times..
The ninety thousand will get you to four hundred sixty thousand shares of course. If i issued myself one hundred eighty thousand shares it would have been two fifty that becomes arbitrary in the beginning. And it s a function of how much you put in and how many shares you ve arbitrarily issued yourself. So now.
Let s continue with this simple example. So that s pretty straightforward so now i immediately find a tenant and i realize that i should probably have some cash on hand for every day maintenance. So i put in another fifty thousand dollars of equity. Which buys me ten thousand shares at least on paper of each share is worth five dollars per.
Share i ve got ten thousand new. Shares if i put in 50000. Of equity. What does that give me an extra a debit of fifty thousand in cash and of course now my equity value has gone up a little bit so now you slightly you know slightly bigger adjustment.
You know here i saw an adjustment a debit and a corresponding credit on the equity side. And then one other bullet here s i also purchase flooring from a vendor that created a payable of twenty thousand so presumably i want to do a little bit of i want to put in some hardwood floors. So i didn t want to pay for this in cash. Yet you know i owe this vendor.
Twenty thousand dollars. So the i ve got a credit for payables of twenty thousand of course. I ve got this flooring that sitting is as an asset now it s bumped up my total asset value up to one thousand or 12. Million remember.
It s five dollars a share the extra fifty thousand gives me an additional ten thousand shares so it so now i ve got i ve gone from ninety thousand two hundred thousand shares against so far hopefully..
I think were straightforward now sometimes pass business is good rental income was flowing and my balance sheet. Now looks like this so i ve got some profits have been generated to retained earnings right so when you generate profits during the year that flows to equity as well. It s not the same as common equity. But it flows to equity.
Bumping up your total equity to 540. And that decreases my cash from the prior 50 to 90. So hopefully that makes sense. I also now seek to do a large renovation and i estimate that i need an extra hundred and fifty thousand dollars.
So in state instead of taking on more debt or putting in my own capital. I decide to issue equity dollars. So this is where it gets slightly more interesting. So now i ve decided i want another hundred fifty thousand dollars.
I want to generate more rental income. The way to do that big renovation is going to jack up rents okay. So how many shares should i issue. So now we re going to use a slightly more interesting question recall that i initially valued each one of my hundred thousand shares at five dollars.
So now suppose if i m trying to figure out because i got to go to the public. Now or presumably have to go to some investors and ask them to give me a hundred fifty thousand dollars. What s the right valuation. So i retain an investment bank.
And yes it kind of go with me on this obviously when you re talking about a business..
This small you re not going to go to investment bank. But can certainly imagine just for the sake of this illustration. If you re running a company. Sizable enough you go to investment bank.
And they re inviting you on this equity. Offering and the advising that assuming that i successfully do this renovation. Right they re trying to figure out what is the equity going to be worth and assuming that you know if you re going to get two hundred fifty thousand and you re successful in getting all this stuff done they re crunching. The numbers trying to figure out what that business might look like now that s generating those higher rents.
And they arrive at the notion that maybe the equity value is around nine hundred thousand right and we re going to talk about this a little more specifically in just a minute. But you know the investment bank and trying to figure out what investors might be willing to pay they re not really thinking about the value of your business in terms of how much equity. You originally put in there trying to figure out the value of the business in terms of the resolute value of the rent that you can generate what is that business words as a function of the future rents you can generate well they came up with a number of 900000. We ll talk about that number in just a.
Second but let s say they came up with that 900000. Number. And so if the business is worth nine hundred thousand not five hundred and forty thousand as it appears on paper right how many shares do you have to issue in order to get. 150000.
150000. So why do you take a moment and try to actually figure that on out on your own how much money do you need how many shares do you need to issue in order to raise 150000. Given the let s say everyone believes. ” .
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